The market is incredibly active right now, and many traders are trying to profit. However, with such volatility on offer. the potential for blowing an account has never been higher.
With this is mind, here are eight rules to take away.
Do not take the market home
Everyone has losing trades. Well, almost everyone. Only gurus and affiliate scammers (I exposed them here) do not have losing trades.
Losing is an occupational hazard. Not only that – losing is an occupational cost. Losing is not a choice.
But how much we lose is always a choice. Always use stop losses and always take losses quickly. By cutting losers we remove the possibility of large losses.
Large losses are bad for our physical capital but also our psychological capital. Large losses can wear us down and make us trigger-shy.
Do not let your emotions get in the way of following your rules and your system.
Do not take the market home.
Keep a trading journal
Monitoring progress is important – but especially so in periods of high activity. If I am placing 20-40 trades a day, I need to know how I am doing.
If I do not – how do I know if all of my activity is generating alpha and profit?
Journaling also ensures we follow our system. Traders who follow a system have an edge over the trader who is unprepared and does not know what to do.
Trading is a habit – and good habits build good traders.
Keep a trading journal.
Monitor the price action
Highly volatile markets have surprise moves. This can result in significant drawdowns if left unchecked.
Protect yourself using alerts – I use SharePad to keep me abreast of price movements.
If a stock is suddenly falling, you should not be praying it stops. You should be jumping out!
When the markets are so volatile stop losses should be used – and keep them tight. By doing so you can protect against downside volatility.
Nothing is worse than seeing a healthy 20% gain turn into a losing trade.
Monitor the price action.
Trade small enough to not hurt deeply but big enough for gains to be worthwhile
Paper trading is pointless. Everyone can make money trading a demo account. It is easy – just cut the losers and run the winners! How hard can it be?
But demo trading is theoretical. And that’s the problem with theory.
In theory, there is no difference between theory and practice. But in practice – there is.
How many online poker players go “all in” when they’re playing for smalls? And how many show the same gumption when the stakes are higher? Exactly.
Demo trading does not work. It is pointless, and a waste of time. I would only ever to suggest to demo trade if you literally have no idea how to work a platform or to watch stocks.
If you want to trade – you need to be willing to get hurt. Nobody is stepping into the boxing ring thinking they are not going to get punched.
They just think they will be the one hitting hardest.
Trade the market, and not your money. Do not trade your P&L.
Trade small enough to protect your account.
But trade big enough for it to mean something.
Stop losses should only ever be changed to reduce risk
Risk management is the be all and end all in trading. You are not a trader – you are a money manager.
The three most dangerous words in trading are these: just this once.
Losing traders say these words before they move their stops and increase risk. The words serve as a justification for the damage they are about to inflict on themselves.
When the single piece of feedback the market is giving you is that the price is going against you – why would you now give that stock the opportunity to hurt you even more?
You would not invite a burglar into your home. But that is exactly what you are doing when you widen your stop.
The danger is not that it hurts you but that the stock recovers and shows you a profit.
Now you have a physical proof that you were right! And guess what happens next time you are tempted to move your stop “just this once”? You remember the time that it rewarded you.
Understand that you are the biggest risk in trading.
The human element of trading is the biggest risk to your future profits.
Serious damage can be done.
Stop losses should never be used to increase risk.
Stop losses should only ever be used to decrease risk.
There is only the present
The past should be chronicled in your journal. The future is yet to come. Your focus should be now.
Wishful thinking is a plague on every trader who is not strong enough to banish these thoughts and control their emotions.
Traders beat themselves up thinking “If only I had bought here”, or the classic “I would now have [insert amount] if I had not sold”.
What is the point? Where is the utility in those thoughts? How are they helping you?
Indecision and regret will wreak havoc on your psychology if you let it. The past has happened and can be learned from, and the future can be prepared for.
All of that learning and preparation can only be done right now.
There is only the present.
Lose your opinion and not your money
Many traders want to be right so badly they are willing to put themselves at risk to prove it.
They will average down, or move their stop, and look for any positives to fulfil their confirmation bias.
But opinions are expensive. It is far cheaper to admit you were wrong and cut your losses than it is to prove yourself correct.
Is your opinion worth going broke over? Strong opinions do not correlate with trading success.
The best traders are able to chop and change their opinion at will – or even better have no opinion at all.
They trade what they see. They do not need to know, and they do not need to care.
They value their money more than their opinion. Stay humble, or the market will humble you.
So lose your opinion – not your money.
Rules are there to be broken
This sounds contradictory but it is true.
The beauty of the market is that the market never remains the same. It changes and you must change with it.
Those who fail to adapt are outcompeted into the annals of history.
Both skill and experience are required to know when to break the rules and to know when the market has changed.
Rules are there to keep traders from blowing their accounts.
But rules are also there to be broken.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.